Peter Thiel couldn’t be more wrong

April 5, 2017

No, I’m not talking about Donald Trump.

Gillette just announced that they are dropping their prices 20% after losing significant market share. Their position has eroded from 70% of the market in 2010 to just over 50% last year. That’s an astounding change.

What happened? And what does this have to do with Peter Thiel?

What happened is simple. Dollar Shave Club and Harry’s recognized an unmet customer need and filled it. What was the need? Cheaper reliable products. Gillette had developed a monopoly and set prices high. Then with those outsized profits, Gillette spent money in the distribution channel to ensure stores only sold – or gave preference to – their products. The whole set up made many customers unhappy but left them with few choices. That is until Dollar Shave Club and Harry’s came along.

Thiel argues in his book, Zero to One, that the job of an entrepreneur is to create a monopoly. He suggests monopolies are good for customers because they support innovation – due to massive profits from the monopolistic company being spent on R&D. He cites AT&T, Microsoft, and others as great examples.

What I’ve seen happen is the opposite: monopolists become fat and lazy and do not invest in the kind of innovation that customers care about. Instead, they invest in protecting their monopoly. It’s amazing to me that he cities Microsoft and AT&T as positive examples. Microsoft built bloated software that many customers hated. They then used their profits to attack, buy, or undermine would-be alternatives. AT&T used its profits to pay lobbyists and fund the campaigns of legislators with the aim of maintaining regulations that protected their legal monopoly. Along the way, AT&T suppressed the development of the Internet because it threatened that monopoly. And as the latest news shows, Gillette price gouged its customers ($6 for a blade vs. 20 cents at Dollar Shave Club).

But Thiel isn’t just wrong about monopolies being good for customers. He’s also wrong about monopolies being good for companies. Yes – in the short-term monopolies allow companies to generate big profits. From the company’s point-of-view that seems good. If the time horizon changes to long-term, however, then the story is quite different.

When I gave my Customers Included workshop at Microsoft two years ago, the Windows division was feeling a lot of pain. For years they had no effective competition, which meant they had not done a number of basic things that most other tech companies had long practiced. They didn’t have to. And to make matters worse, they realized they had lost a lot of customer trust. Apple’s resurgence – and particularly the iPhone – did, brought a new sense of urgency and commitment to Microsoft. And today the company is actually doing much better.

Gillette is the latest case in point. Yes – they were able to generate monopolistic profits but it was that very ability that undermined them in the long run. Customers did not like having to pay $6 for a blade. Dollar Shave Club and Harry’s figured that out and then used the Internet – a distribution channel that Gillette could not control – to create new models that undermined the Gillette monopoly and made customers happy.

Gillette can now cut prices but it may not stem the defections. A lot of the damage to the customer experience has been done and many of those customers are never returning.

Ms. Lieberman, the Barclay’s analyst, called Gillette’s move a “full capitulation on price,” and said she doubted it would stem the company’s market-share erosion in the long run. “We think it will be very tough to switch users back from Dollar Shave Club & Harry’s,” she wrote. (1)

It’s clear that monopolies are bad for customers. But, Thiel not only misses that, he also misses how monopolies are bad for the companies themselves. Eventually, the world changes enough so that new entrants change the rules of the game. And the lazy monopolist is not prepared to respond because the very fact of their monopoly meant they did not have to build the right culture, processes, or products. Further, the company has typically hurt its reputation with customers and the moment customers get a viable option to switch, they do it in droves. And they do not return. In other words, monopolies create a kind of off-balance sheet ‘customer debt’ that becomes difficult if not impossible to repay when the monopoly goes away.

Final note: Gillette himself wrote books advocating for a utopian world. What would be so great about the world Gillette imagined? Wait for it. Drum roll, please. Yes – it would be run by one huge, global single corporation that eliminated the evils of competition. Ironic. Yet that is also the logical extension of Thiel’s argument. One huge single monopoly. And that obviously is no utopia.

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